Term Sheets are a vital document. It forms the base for contracts or agreements. Be aware and fully informed about the relevant details and clauses involved.

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Understanding Term Sheets
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What is a Term Sheet?
1) A term sheet is a non-binding agreement setting forth the basic terms
and conditions under which an investment will be made
2) It serves as a template to develop more detailed legally binding
documents
3) Once the parties involved reach an agreement on the details laid out
in the term sheet, a binding agreement or contract that conforms to
the term sheet details is then drawn up

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What is include in Term Sheet?
1. Valuation of the company – Pre and Post Money
2. Amount of investment
3. The percentage stake sought
4. Voting rights
5. Liquidation preference
6. Anti-dilution provisions
7. Investor commitment
8. Exit Rights of the investors
9. Option pool
10. Information and Inspection rights
11. Arbitration
12. Other essential terms

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Why do we need a Term Sheet?
1) preclude the possibility of a misunderstanding and lessening the
likelihood of unnecessary disputes
2) Ensure that expensive legal charges involved in drawing up a binding
agreement or contract are not incurred prematurely.

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Keys Cluase – Drag Along
1) Typically secures benefits of the majority share holder
2) Drag along means if I sell, you need to sell along
3) This clause enables a majority stakeholder to force a minority
stakeholder into sale of the company/shares

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Keys Cluase – Tag Along Rights
1) This clause is an opposite of drag along
2) Tag along means if you sell, I have right to come along
3) This clause provides right to a shareholder to sell along, if other
shareholder is selling their stake

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Keys Cluase – Anti-Dilution Protection
1) Prevents interest of existing share holders if the company further
issues equity at lower valuation as compared to previous round
2) This is designed to protecting investors from loosing ownership of the
company
3) Exercise of such clause will result in issuing additional bonus shares
being issued to those with anti-dilution rights

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Keys Cluase – Liquidation Preference
1) Liquidation preference sets out who gets paid first, and how much in
event of sale, liquidation, or bankruptcy
2) It is often found investors keeping this clause in their favour to protect
their risk in investment

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Keys Cluase – Option Pool
1) An option pool is a way a startup company can acquire talented
employees by offering them stock if the company does well enough
to go public. Employees receive percentages of the option pool when
they're hired, with the amount changing based on how early the
employee joins the company and what their position within the
company is.

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Keys Cluase – Affirmative Rights
This clause lists down the events for which affirmative consent shall be
taken from the investors. Some examples are:
1) Amending company’s organizational documents
2) Changing company’s share capital including issuing new shares,
creating new classes/series of shares, issuing ESOPs, etc.
3) Paying dividends
4) Any fresh issue of shares or other instuments
5) Approving any merger, asset sale, acquisition,
change of control transaction, etc.
6) Approving company’s liquidation or dissolution
7) Any other significant events

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Keys Cluase – Exit Rights
Details relating to investor’s safe exit from the company is described.
Some common inclusions are:
1) Preferred exit
2) IPO, Next Funding Round
3) Drag Along
4) Tag Along

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